An agreement is not penalty if it simply reserves to a creditor the right to have his debt paid in full in the event that his debtor does not pay on a due date a smaller sum that he has agreed to accept in satisfaction
Lord Hatherley said: ‘I take the law to be perfectly clear upon these matters which we have to consider with reference to this and the subsequent agreements, namely, that where there is a debt actually due, and in respect of that debt a security is given, be it by way of mortgage or be it by way of stipulation that in case of its not being paid at the time appointed a larger sum shall become payable, and be paid, in either of those cases Equity regards the security that has been given as a mere pledge for the debt, and it will not allow either a forfeiture of the property pledged, or any augmentation of the debt as a penal provision, on the ground that Equity regards the contemplated forfeiture which might take place at Law with reference to the estate as in the nature of a penal provision, against which Equity will relieve when the object in view, namely, the securing of the debt, is attained, and regarding also the stipulation for the payment of a larger sum of money, if the sum be not paid at the time it is due, as a penalty and a forfeiture against which Equity will relieve.
Now, that being clear on the one hand, it is equally clear on the other that where there is a debt due, and an agreement is entered into at the time of that debt having become due and not being paid, in regard to farther indulgence to be conceded to the debtor, or farther time to be accorded to him for the payment of the debt, or in regard to his paying it immediately, if that be a portion of the stipulations of the agreement, or at some future time which may be named, and the creditor is willing to allow him certain advantages and deduction from that debt, as well as to extend the time for its payment, if adequate and proper security in the mind of the creditor be afforded him as his part of the bargain in respect of which he is to make these concessions, then it is perfectly competent to the creditor to say: ‘If the payment be not made modo et forma as I have stipulated, then forthwith the right to the original debt reverts, and it is to be open to me to proceed with reference to the original debt, and to exercise all those powers which I possess for compelling payment of the original debt; in other words, I am entitled to be replaced in the position in which I was when this agreement; which has been not broken, was entered into’.’
Lord Colonsay said: ‘It is the reservation of an existing right. It is not the emergence of a right that was never in existence at all except on the violation of the agreement which was made. It is merely the reservation of what is the just and honest right of the party, which he was willing to waive to a certain extent, provided his debtor would do certain things, but if the debtor fails in doing those things, then that right which belongs to the creditor shall continue to belong to him, and he may enforce it’.
Lord Westbury said: ‘It is plain enough that if part of a debt has been duly and unconditionally remitted, the part so unconditionally remitted ceases. If it be revived it becomes a subject in respect of which there is no longer any contract in existence, and which therefore may properly be regarded as a penalty.’
Lord Westbury, Lord Hatherley, Lord Colonsay
(1869) LR 4 HL 1, (1869) 4 HL 1
England and Wales
Cited by:
Cited – Wright and Another (Liquidators of SHB Realisations Ltd) v The Prudential Assurance Company Ltd ChD 6-Mar-2018
IVA is a special form of contract
Liquidators asked the court whether sums sought by the insolvent company’s landlords were payable and or provable. Under an IVA, the copany had been paying reduced rents, but the arrangement document provided that the full rents would be restored on . .
Lists of cited by and citing cases may be incomplete.
Contract
Leading Case
Updated: 01 November 2021; Ref: scu.605850
